Are Euro Regulators Losing Power?

December 13, 2005

By Carol Matlack In a case closely watched by companies and antitrust experts on both sides of the Atlantic, the European Union's second-highest court on Dec. 14 upheld a 2001 decision by European trustbusters that blocked a planned merger between General Electric (GE) and Honeywell International (HON). But the court also found flaws in some of the European regulators' key findings, and that could lead them to take a more cautious approach in reviewing future mergers.

In its ruling, the Luxembourg-based Court of First Instance agreed that a tie-up between GE and Honeywell would have allowed a combined company to dominate the jet-engine market for large regional and corporate aircraft, and for small marine gas turbines. That was one of the reasons European Commission regulators cited when they barred GE's planned $42 billion acquisition of Honeywell, even though U.S. antitrust authorities had earlier approved the deal.

LOSING GROUND. The 2001 decision, spearheaded by former antitrust czar Mario Monti and his Merger Task Force, showed that Brussels was willing to flex its regulatory muscle against global corporate giants. But since then, the trustbusters have suffered setbacks in EU courts that have reversed their decisions on three other merger cases.

The GE-Honeywell ruling continues that trend, legal experts say. While the Court of First Instance agreed with EC regulators on the question of market dominance, it rejected their contention that the merger would have had other anticompetitive effects. For example, Monti's team had argued that the merger would create a "conglomerate effect," allowing the merged company to gain unfair advantage over competitors by "bundling" sales of GE engines with Honeywell avionics and other products.

The First Court ruled against that finding. The regulators "won on simple, traditional grounds, but on the more complicated analysis, the court said they hadn't proven it sufficiently," says James Killick, a Brussels-based antitrust lawyer at White & Case. "That could limit the [regulators'] ability to push too far" in challenging future mergers, Killick says.

BACKING OFF. The ruling has no practical impact on GE and Honeywell, which said after the 2001 decision that they were dropping their merger effort. But, says Chris Bright, a London-based lawyer at Shearman & Sterling who represented GE: "It's the final nail in the coffin" of overly aggressive merger reviews by EC regulators.

Earlier this year, the EU's top Court of Justice rejected a similar "conglomerate effect" argument by trustbusters who had sought to block Swedish packaging group Tetra Laval's acquisition of Sidel, a French manufacturer of equipment used in making packages. "I think the commission will be reluctant to go near this stuff again," Bright says.

Although regulators may now have less maneuvering room on merger cases, the decision is likely to have little effect on other pending EC antitrust actions -- including a high-profile case against Microsoft (MSFT). Unlike the GE-Honeywell case, it doesn't involve a merger, so different legal issues are at stake.

MERGE AHEAD. While both cases are under the jurisdiction of Monti's successor, Neelie Kroes, the lawyers and economists who developed the GE-Honeywell case work in a different division of her office from those handling Microsoft.

In the Microsoft case, regulators have found that the software giant abused its dominant market position. They fined the software giant $600 million and ordered it to offer stripped-down versions of its Windows operating system to consumers and to disclose details of its software code to make it easier for rivals to sell compatible products. Microsoft is appealing the decision to the Court of First Instance, which is scheduled to hear the case in 2006.

Will future merger deals get a smoother ride through Brussels? It's too soon to say for sure. But it's now clear that Europe's regulatory muscle can't overpower its judicial muscle.